Supply chain postponement and speculation strategies: How to choose the right strategy

Journal of Business Logistics, 1998 by Pagh, Janus D, Cooper, Martha C

Effective management of a supply chain includes thinking creatively about how to integrate and perform logistics and manufacturing activities. Postponement and speculation strategies offer opportunities to achieve delivery of products in a timely and cost-effective manner by rearranging the conventional production and logistics structures, which are often designed and managed autonomously.1 Supply chain advancements have frequently been achieved by reducing risk and uncertainty through the employment of sophisticated forecasting techniques, with a low degree of cooperation and integration between the manufacturing and logistics processes. By employing the concept of postponement and combining it with a holistic view of the supply chain, a small number of best practice companies, some of which serve as examples in later sections, have managed to increase the performance of their firms and the supply chain as a whole.2

Few substantial efforts have been made to operationalize the theory of postponement and speculation (P/S) in a way useful to managerial decision making.3 This article identifies generic supply chain PlS-strategies, and provides manufacturing and logistics managers with a diagnostic and normative framework for selecting PlS-strategies. Focus is placed on the downstream part of the supply chain, from factory level to end customer.

THE CONCEPT OF POSTPONEMENT

The concept of postponement has a long history of practical applications, as well as academic literature. Practical application of the concept can be traced back to the 1920's.4 The first detailed empirical descriptions appeared in the 1960's.5 In the literature, the concept was originally proposed by Alderson6 and later expanded by Bucklin.7 The logic behind postponement is that risk and uncertainty costs are tied to the differentiation (form, place and time) of goods8 that occurs during manufacturing and logistics operations. To the extent that parts of the manufacturing and logistics operations can be postponed until final customer commitments have been obtained, the risk and uncertainty of those operations can be reduced or fully eliminated.

The notion of manufacturing postponement is to retain the product in a neutral and noncommitted status as long as possible in the manufacturing process.9 This means to postpone differentiation of form and identity to the latest possible point.10 The notion of logistics11 postponement is to maintain a full-line of anticipatory inventory at one or a few strategic locations.12 This means to postpone changes in inventory location downstream in the supply chain to the latest possible point.13

Two key and very well known contributions to the concept of postponement are the results by Cooper, and Zinn and Bowersox.14 Cooper identifies four different supply chain postponement strategies for global brands. These are the bundled manufacturing strategy, the unicentric strategy, the deferred assembly strategy, and the deferred packing strategy. In the key work by Zinn and Bowersox, five different types of postponement strategies are identified. Four different strategies of form postponement (labeling, packaging, assembly and manufacturing) which, when combined with time postponement, constitute the five postponement strategies. In a later discussion section, the strategies outlined in this article will be examined in relation to Cooper's, and Zinn and Bowersox's postponement strategies.

The converse concept of postponement is speculation, which holds that changes in form, and the movement of goods to forward inventories, should be made at the earliest possible time to reduce the costs of the supply chain.15 Speculation makes it possible to gain economies of scale in manufacturing and logistics operations, and limit the number of stock outs.

The remainder of the article is structured into four sections. In the first section, four generic supply chain P/S-strategies are identified and described. The second section will examine different decision determinants suited for selecting a P/S-strategy. A managerial tool, the Profile Analysis, that can be used to select the most appropriate P/S-strategy, is presented in the third section. The fourth section compares and contrasts the presented framework with two key works on postponement by Cooper, and Zinn and Bowersox.16 Finally, this is followed by a brief conclusion.

IDENTIFICATION OF GENERIC SUPPLY CHAIN P/S-STRATEGIES

A 2x2 matrix presented in Figure 1 identifies four generic supply chain P/S-strategies, by combining manufacturing and logistics postponement and speculation. The matrix will be referred to as the "P/S-Matrix". The four strategies are: the full speculation strategy, the logistics postponement strategy, the manufacturing postponement strategy, and the full postponement strategy.

The rows of the matrix represent whether manufacturing postponement or speculation is employed, and the columns whether logistics postponement or speculation is employed. The various strategies have several inherent advantages and disadvantages. Some of these, together with a short description of each strategy are outlined below. The discussion of advantages and disadvantages is primarily based on costs and customer service17 as evaluation parameters.